With the broker’s forecast earnings growth and the yield on offer based on forward dividend estimates, the price target appears well within the company’s reach. As a result last week’s slight pull back in the company’s share price may offer a buying opportunity.

AHG has been a growth by acquisition story, mainly over its purchase of motor vehicle dealerships in an industry that still offers significant scope for consolidation.

But the most recent acquisition,
Scotts Refrigerated Freightways
, is one of its largest in terms of size and is pitched at bolstering the company’s logistics operations rather than its ­portfolio of motor-vehicle dealerships.

The $116 million acquisition which included
JAT Refrigerated Road ­Services
, a chilled and frozen transport company in Queensland, completed this week with a cash consideration of $71 million, 4.3 million AHG shares and the assumption of about $30 million of finance leases.

Signs of a breather

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Company Profile

After strong growth, there are signs the motor vehicle industry may be due for a breather. In light of this, management’s decision to invest in the logistics area of its business appears well founded. SRF is forecast to generate earnings before interest, tax, depreciation and amortisation of about $25 million in 2013-14 from revenues of about $240 million.

This implies healthy margins of about 10.5 er cent, further supporting management’s decision.

On this note, comparisons with ­margins currently being generated by AHG’s existing operations highlights the worth of the SRF acquisition and the extent to which it will not just support top-line growth, but provide bottom line earnings quality.

Based on Bell Potter’s 2013-14 forecasts, which indicates EBITDA of $179.6 million from revenues of $4.6 billion, the company is on track to deliver margins of about 3.8 per cent.

Because of the timing of the SRF acquisition, it will have little impact on 2013-14 earnings and the margin improvement should be evident in 2014-15 and beyond.

AHG’s forward estimates indicate margins of 4.3 per cent and 4.4 per cent in 2014-15 and 2015-16. They also show a substantial rise in the proportion of earnings from transport, cold storage and logistics, implying improved ­revenue diversification, which in turn provides some insulation should the automotive industry face more ­challenging industry conditions.

Logistics revenue

In 2013-14 the logistics business should achieve about $800 million in revenues, representing about 17 per cent of group income.

But with the addition of SRF, this area should account for about 20 per cent of earnings in 2014-15.

The SRF acquisition also gives annualised cost synergies of about $4 million, mostly realised by 2015-16 from the rationalisation of cold storage facilities in Perth, Adelaide and Melbourne.

Managing director
Bronte Howson
said the acquisition, combined with the existing Rand and Harris operations, consolidated the group’s position as Australia’s largest transport and cold-storage operator.

AHG’s $115 million capital raising to help fund recent ­initiatives was well supported and a placement price of $3.49 ­represents a nominal 3 per cent ­discount to the closing price prior to the raising.

The fact that the company’s shares have already surpassed the placement price, trading up to $4.12 in late April, suggests significant confidence that the proceeds have been well invested.

Management has a good record for delivering healthy shareholder returns, consistently generating strong return on equity and paying robust dividends.

Forecasts point to a 24¢ dividend in 2014-15, implying a yield of 5.4 per cent relative to Bell Potter’s price target.

The group is trading on a ­price-earnings multiple of 11.7 relative to consensus forecasts for 2014-15.

Bell Potter’s forecasts imply compound annual earnings per share growth of 16 per cent between 2013-14 and 2015-16 and the company looks good value on price-earnings to growth.